Dos and don’ts in a falling market

Play your cards well now to cash in when the markets revive

Indian equity investors have gone through one of the worst weeks in recent memory with the Sensex and the Nifty shedding more than 5 per cent in the past week. For investors who have just joined the stock-market fraternity, this would have come as an unpleasant surprise.

The benchmark indices, the Sensex and the Nifty, had been enjoying an unbridled bull-run since February 2016. The two corrections since then, in the last quarter of 2016 and in February and March 2018, have been relatively shallow, resulting in value erosion of only 10 per cent from the index peaks.

The decline from the Sensex and Nifty’s recent peaks is already edging close to 12 per cent. But of greater concern is the fact that the negatives seem to be piled high at this point — sliding rupee, rising crude oil prices, a trade war that is spinning out of control, rising treasury yields in the US and tightening global liquidity.

While things do look bleak at this point, market veterans will tell you that just one small trigger is enough to change the market sentiment. Indian markets have many strong favourable factors at this point.

Domestic liquidity

The focus so far has been on foreign portfolio investors pulling money out of Indian equities. While it is true that they have so far pulled out ₹17,598 crore from Indian equity markets in 2018 and are contributing to the sell-off, domestic mutual funds have emerged a strong counter-party to absorb the selling in recent years. Mutual funds have net purchased ₹88,667 crore worth of stocks so far in 2018.

In 2017, domestic MFs net purchased more than twice the amount purchased by FPIs, and in 2016, MFs bought thrice as much as FPIs. With inflows into domestic mutual funds surging since 2014, MFs have now emerged a dominant force that can cushion such declines in our market. The good news is that much of these flows are in the form of SIPs that tend to continue despite market vagaries.

Despite the gloom and doom surrounding the market currently, private consumption — both urban and rural — continues to be upbeat.

Consumption to stay upbeat

With the RBI deciding to adopt a calibrated approach to rate hikes, the consumption apple-cart will not be upset too much in the near term. While stocks in sectors driven by domestic consumption, such as FMCG, consumer durables, media and entertainment, had run up too much in the past two years and become pricey, the recent correction has made value emerge in many of these sectors.

Moreover, earnings of India Inc have been decent in recent quarters. In the June 2018 quarter, listed companies delivered 16.5 per cent revenue growth and 22.3 per cent earnings growth compared with the same quarter the previous year. While it can be argued that the roll-out of GST depressed the earnings in the June 2017 quarter and hence might have inflated the growth, the nominal economic growth of close to 11 per cent bodes well for company earnings in the future, too. There are headwinds in the form of the stressed assets of the banking sector, looming elections and the impact of rising crude prices. But overall, India Inc is not too badly placed to face these.

What should investors do?

That said, it is apparent that Indian markets are now beginning to play catch-up with their global counterparts. In 2018, the Sensex and the Nifty were among the biggest gainers compared with other global indices, despite the worries on the rupee and the external account. Indian markets are now falling in line with others. The decline could, therefore, continue for some more time as the trade war, rising crude prices and higher yields in the US cause foreign fund outflows from Indian markets. So what should you do if the correction continues?

Stick to large-caps

Large-cap stocks typically tend to be the sector leaders in each space and are the first to revive when the trend reverses. On the other hand, smaller stocks that take a deep cut in corrections take many years to revert to their pre-correction prices.

Another reason why large-cap stocks are recommended at this juncture is because mutual funds seem to have a larger holding in the bigger stocks. As of June 2018, the top 20 stocks listed in India — ranked according to their market capitalisation — accounted for 42 per cent of MF assets, and the top 50 stocks accounted for 58 per cent of MF holdings. It’s therefore apparent that these are stocks that will be bought first when markets revive.

Do not try to time the market

Trying to time the market is a mug’s game, for no one really knows how much is enough as far as market corrections go. The correction in 2008 resulted in the Sensex declining 66 per cent from its peak. Anyone who thought the bottom was hit when the Sensex declined 30 per cent in 2008 would have rued his decision a month later when his investment would have halved. Similarly, someone who waited for a 60 per cent decline in the Sensex in the 2015 correction would have not purchased any stocks then, as the correction halted after a 25 per cent decline from the peak.

It would be best to stick to your systematic investment plans in market declines so that you can make the most of the fall to buy more units. Indian markets are on a multi-year bull-run and your investments will surely pay off over the longer term.

Look for value

Lastly, do not lose focus on the stock fundamentals. Corrections such as these give you the opportunity to buy your favourite stock at a better valuation. Keep a hawk-eye on the stock’s PE ratio.

If it falls below its three-year average and if the business prospects are all right, you know that you have nothing to lose over the longer term.

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